The Gold Report: A recent issue of Stansberry Digest addressed how the European bailout will influence the U.S. dollar—or, as some would put it, the U.S. dollar implosion. How do the paper currency issues afoot in Europe set up gold for a bull run?
Matt Badiali: First of all, if you think of the Fed as a company, they can print as many shares in the form of money as they want, but the underlying value of the whole company doesn't change. So that means the value of every share that they print or every dollar that they print has to get smaller to reflect its portion of the whole. At least with a share, you know that you own a piece of a company. It used to be that every dollar issued was backed up; you could take it in and you could get something—like gold or silver—for it. Paper currencies now are really IOUs that aren't backed by anything. There's really not much holding them up.
In the past when we've seen paper currencies implode, say in Argentina 10 years ago, and the typical American or Western European figured, "Oh, that will never happen to us. We're smarter than that." Now, having just watched this implosion with the European Union, they realize, "Holy smokes! This is real; this could absolutely happen to us."
The smart money is watching George Soros and John Paulson and the like—people who have been very, very smart and very, very right about their investing in the past. They're betting heavily on gold, getting in front of gold now. Beyond maybe buying a few shares of gold ETFs, not many retail investors recognize gold as money. Really, that's what gold is; gold isn't useful for much of anything else. They make some foils out of it to use on spaceships, but it's not an antimicrobial like silver; it's not a good catalyst for cracking hydrocarbons like platinum.
TGR: What about jewelry?
MB: It does make for nice jewelry, but ultimately, jewelry is a symbol of wealth. Years ago, you could break a link off a piece of jewelry to pay for something. I think this whole financial crisis in Europe is going to sink in with the U.S. consumer and also around the world. I don't mean to say the U.S. will drive the price of gold higher, but I think the Euro price collapse will hit home on a different level than ever before.
When you see Greeks rioting in the streets and you see people writing trillion dollar checks to save a currency, this is hitting home, and I think people are going now to start taking gold a lot more seriously as a store of wealth. This has been fairly abstract until now.
TGR: What do you think could take gold to $2,000?
MB: Look back just five years. The gold ETFs started life at $40 a share; they're now at $120 a share. That's more than 200% gain in just five years, driven by turmoil. The financial turmoil over the past five years has been nothing compared to what we've seen in the last 12 to 18 months, but the fallout of the economic crisis is still coming. We can expect slow insidious inflation as more and more money gets printed. Every time there's a bump in the road, governments want to print more money. Investors are going to take it far more seriously now than they have in the past, and I think that $2,000 is very, very reachable from here.
TGR: A good time to invest, then?
MB: This is not the time to be speculating in gold. I wouldn't buy a bar of gold thinking I'm going to sell it in six months. I'm going to put it away and when my children get married, that's a wedding present. My grandmother always used to tell me about penny candy at a little store by the lake where she lived. By the time I was old enough to go to that store, the penny candy cost a nickel. Now it's $1.25. That's the power of inflation, and it's going to get a lot worse over the next 10 to 20 years. That's the timeframe I would use to invest in gold. People should absolutely have some of their wealth in gold because that is going to be a very safe, long-term store of value.
TGR: As you reiterated in a piece we saw published last week, you believe in holding actual physical gold as a form of savings. But can people also take advantage of the security of gold in the marketplace?
MB: When you're talking about investments; that's a shorter timeframe now. Gold miners stocks are absolutely a tremendous way to go. The last time we spoke, we talked about seven different companies: Miranda Gold Corp. (TSX.V:MAD), Altius Minerals Corporation (TSX.V:ALS), Fronteer Gold Inc. (NYSE.A/TSX:FRG), Northern Dynasty Minerals Ltd. (NYSE.A:NAK;TSX:NDM), and Seabridge Gold Inc. (NYSE.A:SA;TSX:SEA).
TGR: Great. Let's start at the top.
MB: Miranda Gold is a junior explorer in Nevada. They were at 33 cents then; they're a bit above 50 cents now. Altius Minerals is another exploration company, looking for everything—nickel, copper and uranium as well as gold. They were at $3.80 when we spoke last; they're climbing back toward their April 6 high, which was C$10.75.
TGR: So far, up on all fronts.
MB: Yes, and it gets better. Fronteer, which has a couple of different gold projects in Nevada, is at about $5.50, up from less than $3 when we spoke before. Northern Dynasty has a big, kind of low-grade, gold project going on up Alaska. They were at $6.25 when we spoke last; they're at $6.97 now. And Seabridge Gold has a humongous, low-grade gold and copper deposit in British Columbia, and they were at $24.50 when we spoke, and they're at $30.44 today.
TGR: Your average return on those seven stocks was 68%. . .I'd take that anytime.
MB: Me, too. These range from exploration-stage companies to folks that are in pre-feasibility, and they've all gone up stratospherically. What's the common denominator here? Maybe not exclusively, but mainly the gold sector. What they're looking for is increasingly valuable; what they have in the ground is more valuable. I really do believe that this is a phenomenal bull market. Yes, it's taken a couple of breaks, but those have just been buying opportunities for the smart money.
TGR: Do you still see some upside in those companies?
MB: I think Fronteer has a lot of upside. I see a lot in Miranda, too. I like the prospect generator business model. If you're going to invest in juniors, I really think you ought to focus on prospect generators such as Miranda. They are really very, very good explorers. They do is they go out and find projects, and bring projects to partners.
These prospect generators do the hard preliminary work, the real Sherlock Holmes part—finding these projects, sniffing them out, getting them right to ready to drill. Then, before they have to spend a lot of money drilling, they find someone with deep pockets who would like to do that. After that, the prospect generator gets carried. In other words, they don't have to spend any more money, but they still own anywhere from 35% to 49% of the project. That's what Miranda does well.
These folks are very, very smart. I have been in the field with them. They have just signed a new joint venture with Ramelius Resources Limited (ASE:RMS), an Australian listing, to come in and drill their projects in Nevada. Miranda has expanded its scope out from its Nevada focus, too, and I'm pretty excited about that. When I met them in Toronto for the big PDAC (Prospectors and Developers Association of Canada) conference in March, they said they were headed to Colombia looking for gold. I wish them the best. Ken Cunningham is one of the smartest geologists I've met, and his team is tremendous.
TGR: Who else?
MB: Seabridge Gold has been on an absolute tear lately. Their recent pre-feasibility study turned their resources at their KSM deposit —for Kerr-Sulphurets-Mitchell—in British Columbia into reserves. It's something like 30 million ounces of gold in reserves, about one-third of Newmont's total reserves. It has an enormous amount of fairly low grade gold—plus copper and I think a little silver.
Seabridge knows how much of the resource is economic and at what gold price. It's economic now, but the capital costs are high. And it's fairly remote, so whoever decides to develop this will have to spend some money on it up front. As far as I am concerned, though, the bull market in gold is going to do nothing but help Seabridge, because the higher gold goes, the faster they can recover their capital costs.
I've been up to this deposit; and what's really amazing is that Silver Standard Resources Inc. (TSX:SSO;NASDAQ:SSRI) owns the adjacent property, Snowfield. Silver Standard is developing some other mines right now; so they're not doing much more than drilling Snowfields. It's higher grade ore than Seabridge's, but it's a little trickier because it is up on top of the mountain. But it is becoming an absolutely enormous resource in its own right.
TGR: Is it bigger than Northern Dynasty?
MB: Northern Dynasty's Pebble deposit has about 63 million ounces of resource at the same grade as KSM. They're two monsters, but when you look at KSM and Snowfield together, I really think it's the largest undeveloped gold project in North America. It's just gigantic. Snowfield adds another 19.7 million ounces of resource to KSM's 49 million ounces of resource. That's nearly 70 million ounces of gold…without going into the silver, copper and molybdenum.
The footprint is unbelievable. There's an area called Iron Cap, off to the side of Seabridge's Mitchell deposit. They haven't even drilled it yet. You fly in there in a helicopter and the side of the mountain is stained green from the copper. The copper and gold are mineralized together, so wherever there is green there is also gold. I think as you see Snowfield develop, somebody will come in and make an offer for the whole thing. It's just too big for somebody like Barrick Gold Corporation (NYSE:ABX;TSX:ABX) or Newmont Mining Corp. (NYSE:NEM) not to own.
TGR: Back to Northern Dynasty?
MB: Northern Dynasty could get better, but they're in a holding pattern. Until they are close to production, we have a ways to go with Northern Dynasty. It's a gold and copper play, so probably will edge higher if the prices of gold and copper keep going up. So although I expect Northern Dynasty to become more valuable, I also think with this company you have more commodity risk than with some of these others.
TGR: Any others you'd like to talk about?
MB: About a year ago I was hunting for gold companies that had more than the gold bull market going for them. I looked at Chinese gold miners because China was seriously acquiring gold, buying bullion wherever they could last summer. I found a group of juniors operating mines in China, including Jinshan Gold Mines Inc. (TSX:JIN).
So in July of last year I told my readers to buy Jinshan. Its one operating mine was having some trouble at the time, but it looked to be a fairly simple problem that the engineers could resolve. I figured if they got this mine going, they would make a lot of money. They did, and we made 340% on that company in less than a year. We'd tightened our trailing stop up to 15% and hit it on May 5. So that tells you something. In this case, we had the China bull market going for us as well as the gold bull market. I think there are just some stupendous ways to really, really boost your portfolio speculating in mining stocks right now, just some tremendous opportunities.
TGR: That's a pretty strong endorsement of miners from the guy who said that mining sucks.
MB: That was an attention-grabbing headline, in fact. I did say that, and I'll tell you why. With oil and gas, you stick a well in the ground and you know right off the bat. If you have it, it's there; if you don't, you don't. Mining is really, really hard, and it's really, really slow. You have to drill to prove you actually have something. You drill, and drill, and drill, and drill, and then you stand back and say, "Well, maybe we might have something here."
But these miners have no earnings. They aren't selling anything while they're busy drilling. They're just spending, so they go back to their shareholders and say, "Well, we think we have something here. Can you give us some money?" Usually the shareholders agree, and the miners go drill some more. Supposing they actually intercept something of value, they face the monumental task and expense of developing it. And once again, they have no revenue, no money coming in.
They need to get cash, and they're desperate. Some smart investors can go up to a desperate mining company and negotiate pretty favorable terms, give them cash to build the mine, in exchange for a long-term supply of whatever metal is coming out of the ground.
TGR: So a royalty company enters the picture. You've called these quite possibly the greatest businesses on earth. Please tell us why.
MB: Yes. I'll use Royal Gold Inc. (NASDAQ:RGLD;TSX:RGL) as my example—that's probably my favorite royalty company; they negotiated some of these royalties when gold was at $200, $300, $400 per ounce gold and build in an escalator clause. So if gold goes to $500, they get a little bit more, and if gold goes to $600, they get a little bit more than that. Five, six, 10 years ago when they were negotiating, they put in a clause to the effect of "If gold goes above a $1,000, we'll get a big fat royalty." Everybody laughed, "Gold over a $1,000; that's ridiculous."
TGR: And guess who's laughing all the way to the bank?
MB: Absolutely. Now, in exchange for the money they paid up front, they get 10 or 15 years of gold production or more, and at $1,000-plus an ounce, they get a big chunk of somebody else's production. That makes them look really, really smart. They don't worry about how high the price of diesel might go. They don't worry whether miners go out on strike. They don't worry about expensive equipment breaking down. All they have to do is show up when the gold is poured and take their cut. I think that's a really, really smart business.
Think about the overhead for a royalty company. No trucks, no fuel costs; you basically have an accountant and a lawyer, and that's about it. So low overhead. Most of the profit goes straight to the bottom line. It's a spectacular business, a fantastic business. And what's wonderful is that the market doesn't get it. If the price of gold hits a bump, the market takes one look at royalty companies, sees that they're claims on gold miners, and sells them off.
TGR: Could you give us a brief overview of Royal Gold—I think you're calling it the Colorado Gold Bank?—and maybe some other royalty companies out there that impress you?
MB: Royal Gold once was a typical mining company. However, when Royal Gold came to own some royalties on the Cortez Pipeline Mining Complex in Nevada, it did very well for them. It became the platform for today's efficient royalty business model. They were pretty smart; they could figure out a good mine, and they knew good operators, and so they were able to negotiate some pretty good royalties. Like I said, most of the royalties had escalators. When the gold price was low, they took a smaller royalty; when the price was higher, they took a bigger royalty. It made sense. The royalty doesn't want to kill the golden goose. They don't want to put the mine out of business. So royalties that fluctuate with the price help keep the mine afloat. And when the mine's really, really profitable, they get a bigger share of the profits, and that's where they are now.
Franco-Nevada Corp. (TSX:FNV), of course, was the original royalty company, formed by Pierre Lassonde and Seymour Schulich. Pierre Lassonde is my hero; he's spectacular. These guys were in business 10 or 20 years before Newmont bought them in the original incarnation of Franco-Nevada. They returned 35% annualized to their shareholders over that time. That's astonishing; an absolutely a phenomenal return. Then Pierre Lassonde became the president of Newmont for maybe four years. Fairly recently, Newmont spun out a bunch of those royalty projects into the new Franco-Nevada. I think Pierre Lassonde is chairman of the board. His star power has propelled Franco-Nevada to fairly dizzying heights.
They were a little too expensive for me, though. I like to buy royalty companies when they're inexpensive, selling at a discount to what their royalties actually are. I spent a lot of time figuring out the value of Royal Gold's reserves per share to the price of gold, and have given my readers a chart so they know when Royal Gold is selling at a discount to the value of its gold reserves. That enables them to buy in those lows, and I think that's a pretty valuable tool.
Another royalty company I really like, which I've done the same thing with, is Silver Wheaton Corp. (NYSE:SLW;TSX:SLW). It's an Ian Telfer project.
TGR: It spun off from Goldcorp Inc. (NYSE:GG;TSX:G) a couple of years ago. I guess he is still chairman of the Goldcorp board.
MB: Another one of those smart guys doing smart things. Silver Wheaton has been more aggressive than some others in acquiring silver royalties. They call it "silver streaming" rather than royalties. They'll go to a big base metal mine and buy the silver production. A lot of times a lead or a lead-zinc mine will produce a small amount of silver in addition to the base metals. Unless they're really interested in silver, they sell it at the smelter and use the proceeds as a credit toward the cost of mining.
Silver Wheaton might go direct to the miner, give them cash up front, and say, "You don't really care about the silver anyway. We'll give you cash now; just give us the silver production from the smelter." They've done a spectacular job of building up a nice portfolio of silver royalties that way. I am a big fan.
To give you an idea of what happens when you buy royalties cheaply, I recommended Silver Wheaton last July, when it was trading for $7.75. That was ridiculously cheap compared to the value of its assets. Today it is trading at about $17.97, so we've made over a 130% gain.
TGR: Got in on the ground floor, so to speak.
MB: I still think it's a buy. When you get these opportunities, you must jump on them, and we did. Just because we've made a lot of money in them doesn't mean that someone couldn't come in it today and make a lot of money still. I think we bought Silver Wheaton at a time when it was extraordinarily cheap.
TGR: Was that also true of Royal Gold?
MB: Not so much. We bought that in March 2009 for $38; it's about $48 now. I think Royal Gold's big acquisition earlier this year has hampered its share performance a bit. They bought International Royalty Corporation, which had a lot more base metal royalties—including their premier royalty on the Voisey's Bay Nickel Mine in Sudbury, Ontario—than Royal Gold did. After a bidding war between Franco-Nevada and Royal Gold, some people felt that Royal Gold paid too much. I went through that portfolio, though, and I am thrilled. It diversifies Royal Gold's portfolio; they now have royalties on coal, oil, a couple of aggregate mines. And of course, gold.
TGR: Royal Gold's assets point to a $106 a share price, which is about 135% above where it is now.
MB: Yes, that's based on the value of their revenues going forward. I think if today's gold price were to stay static and a couple of mines come on-line the way they're supposed to, at 15 times earnings multiple, it's worth a $100-plus a share, easily.
TGR: Any final thoughts for our Gold Report today, Matt?
MB: Speaking at the PDAC in Toronto, Pierre Lassonde said if big miners had a good first quarter this year, we should mortgage our houses to buy them. And they've all had stupendous quarters; their profit margins have gone way, way up.
TGR: Keeping pace with the price of the commodity for a change.
MB: It's always dogged the big miners that they haven't returned anywhere near the price of gold. They're mining gold, producing gold. When the price of oil goes up, the oil producers stocks go up in value, right? The problem was the costs kept chasing the price of gold up. As a result, the grade of their ores was falling while the costs of mining were rising, pacing the rise in gold price. That's held them down for a very long time and they've been overlooked. I think we're going to see them really soar over the next 12 to18 months, and the market's paying attention.
So my final thought for the day? Buy big gold right now.
TGR: Thanks, Matt.
MB: One more thing. I don't care if you're a 90-year-old retiree or a 35-year old with lots of earning power ahead, you must have gold (the metal) and big oil in your portfolio. We are in the midst of one of the greatest resource bull markets of all time. You've got to have exposure. You absolutely must.
Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources—from small exploration outfits, to equipment companies, to the biggest commodity companies in the world. In Matt's own words, "as a geologist, I focus on all natural resources including silver, uranium, copper, natural gas, oil, water, and gold, just to name a few." He's also a regular contributor to Growth Stock Wire , a free pre-market briefing on the day's most profitable trading opportunities. Matt has real-world experience as a hydrologist, geologist, and a consultant to the oil industry and he holds a master's in geology from Florida Atlantic University.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Miranda, Goldcorp, Franco-Nevada and Jinshan.
3) Matt Badiali: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies: None.
